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Key Considerations for Employees who are Offered Equity or Deferred Compensation

By: Jennifer Mathers McHenry

In the race for talent, deferred and equity based compensation may take center stage. Employees – and, indeed, many employment lawyers – will need to better understand these compensation structures going forward as they become more prevalent and more widely available outside of senior employee and executive levels.

Bank of America has announced that for the first time they are significantly broadening their stock awards program to lower level employees who make up to $100,000/yr. In making this announcement the employer stresses that the stock awards being granted to employees have significantly greater value than the cash awards such employees have historically received.

If you are receiving equity compensation or deferred compensation as part of an offer of employment, it is important to understand that it cannot be directly compared to a cash offer of equal value. It is also vital to understand that the terms and restrictions which accompany these awards vary widely among different institutions (as does how well these terms are written and indeed whether they effectively limit employee rights as they purport to).

If you are considering a role that comes with deferred or equity based compensation (RSUs, PSUs, options, restricted shares, carried interest, trailer fees, or even deferred cash compensation), here are some key questions you should have in mind, especially if you are weighing it against your current job or other offers:

1. What is the vesting period and does the award vest a bit each month or year or does it “cliff” vest at the end of a years long period? The value of an award that will not be paid for 4 years is not the same as a cash award paid immediately or even a 4 year award that vests and is paid 25% each year;

2. What are the conditions precedent for payment? Are they within my control?

3. What happens to this compensation if I resign or retire?

4. Does the compensation come with forfeiture or other provisions that may hinder me working elsewhere – or cause me to lose this part of my compensation – after I leave? Does that change if I am terminated without cause vs resign?

5. When the compensation becomes mine, how will it be paid? Will I receive stock or cash? What are the tax implications?

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